Identify the cross-border payment, then explain why imports, overseas investment, income transfers, remittances or intervention require one currency to be exchanged for another.
Nigeria has a mixed economic system. In January 2023, Nigeria had a high unemployment rate of 33% which created a number of costs. Its high inflation rate of 22% had several effects on the country's firms. In 2022 and the start of 2023, Nigerians increased their demand for foreign currency.
Analyse the causes of an increase in the demand for foreign currency.
Analyse the causes of an increase in the demand for foreign currency.
Coherent analysis which might include:
To buy more goods and services from that country / higher demand by other countries for that country's products (1) increased foreign tourism (1) may be the result of higher inflation in the buying country (1) may be due to removal of trade restrictions (1) rise in quality of the other country's products (1) higher incomes in the buying country (1). To speculate / increased confidence in the currency (1) that it will rise in price / value (1) make a profit (1).
To invest more in that country (1) e.g. set up a branch of a MNC / FDI (1) MNC sending profit home (1).
To send more money home to relatives (1) workers' remittances (1). The government / central bank may buy it (1) to influence the exchange rate (1) add to the reserves (1).
To take advantage of a rise in interest rates in that country (1) increase hot money flows (1) increase return on saving / financial investment (1). More people may migrate to that country (1) to e.g. buy a home in another country (1).
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